The Wisdom of Crowds Fails Yet Again at Newsfutures
Last month I wrote a little bit about the notion of how the Wisdom of Crowds hypothesis just isn’t borne out sometimes. I considered the case of Newsfutures about which The Wisdom of Crowds author James Surowiecki writes:
In a sense, the Newsfutures traders are only trying to do what op-ed writers, TV pundits, and Presidential advisers attempt to do every day: predict the future. The big difference is that the markets are far more likely to be right.
Millions of people can’t be wrong? Oh, yes they can, and on Newsfutures, too. On the markets for July 22, I noticed…
…the presence of two events “There will be less than 17 named Atlantic storms in 2006,” and “There will be less than 9 named Atlantic storms in 2006.” Now, if crowds are really wise, if the markets are really smart, they’d know that the probability of the former must be higher than the probability of the latter. Whenever the latter is true, the former is also true, and there is also a set of possible outcomes for which the latter is false but the former is still true. Therefore, it must be more likely that the former occurs than that the latter occurs. Must, must, must.
And yet, at 11:00 pm EST last night, the cost of a share of “There will be less than 17 named Atlantic storms in 2006” was equal to the cost of a share of “There will be less than 9 named Atlantic storms in 2006.” Each was selling at a price of 53 X dollars. That’s not wise. It’s foolish. It’s stupid, crazy, irrational.
This was not just a fluke. At 4:30pm EST on August 8, a share based on the conjecture that “There will be less than 17 named Atlantic storms in 2006” was selling for less money than a share based on the conjecture that “There will be less than 9 named Atlantic storms in 2006.” In other words, the people who play the newsfutures markets are betting that the event of fewer than 9 named storms is more likely than the event of fewer than 17 named storms.
This morning at 8:20am EST, I checked again. The share price for “less than 17 Atlantic storms” was equal to the share price for “less than 9 Atlantic storms.” The more I check in, the less I think the Newsfutures crowd is wise.